Japan’s Suzuki Motor (SMC) is expected to invest a total of Rs 18,500 crore in its Gujarat plant for a total car production capacity of 1.5 million a year through a wholly owned subsidiary, with Maruti Suzuki India (MSIL) making Rs 10,500 crore from SMC’s investment by entering into a contract manufacturing agreement (CMA).

These were highlighted in an investor presentation filed on the BSE by the car market leader on Friday, which said that the boards of SMC, its subsidiary Suzuki Motor Gujarat (SMG) and MSIL have all agreed to the new terms. The Gujarat government has also agreed to pass on the tax benefits to SMG, which were previously guaranteed to MSIL.

“MSIL could earn about Rs 10,500 crore, assuming a post-tax return of 8.5% pa during the initial 15-year period of the CMA from the savings of investments not made in Gujarat. The earnings on investments not made by MSIL in Gujarat would continue during the extended period of the CMA,” the presentation said, adding that the additional funds available with MSIL will enable it to strengthen our marketing and sales infrastructure, R&D, and overseas market penetration.

SMC, which has more than a 56% stake in MSIL, hopes to proportionately benefit due to generation of additional profits at MSIL from the incremental sales achieved through sale of the products manufactured by its subsidiary SMG. “These financial benefits would be much higher than the return which SMC would have got on the equity invested in Gujarat as compared to other options. We believe that this arrangement will bring substantial benefits to MSIL compared to the option of investing in Gujarat on its own,” the presentation said.

In a bid to convince foreign investors of the benefits of MSIL’s manufacturing agreement with SMG, a select team of senior company officials will now visit the US, UK, Singapore and Hong Kong from mid-June to August. The team includes chairman RC Bhargava, managing director Kenichi Ayukawa and chief financial officer Ajay Seth.

MSIL had after a protracted tiff with minority shareholders earlier this year decided in March to seek their approval for the Gujarat unit, to be set up as a wholly owned subsidiary of parent Suzuki Motor. Once the company completes the investor meets, the special resolution will be put to vote, Bhargava told FE. “Once the new manufacturing agreement is in place the investor meets will start,” Bhargava said.

The controversy regarding the Gujarat plant started when on January 28 MSIL said its board had decided the plant would be owned and built by its parent firm SMC with an investment of around R3,000 crore.

SMC would invest in the plant through its subsidiary SMG. The plant, which would be the first fully-owned factory of the Japanese giant, will have an initial capacity of 250,000 cars a year, all of which will be supplied to MSIL.

The Street was opposed to the structure despite changes by the management on February 26. While earlier the Gujarat unit was to remain an SMC subsidiary, the company later said if the contract manufacturing agreement were to expire, and in case it was not extended by mutual consent, the “assets would be transferred to MSIL at a fair value to be determined by independent valuation”.

It also said that the capex needs of the Gujarat subsidiary would be met by the depreciation of the subsidiary, an amount generated as net surplus from the car pricing and equity infusion from SMC, to the extent necessary. Upset, a clutch of 16 institutional investors wrote a strongly worded letter to the company questioning the opacity in the decision regarding the subsidiary and asked the MSIL management to quash it as it would turn the company into "shell" entity. Institutional investors together hold almost 14% in MSIL, while the promoters have a 56.21% shareholding.